Reference

A tale of Venture Capitalist Tragedy

Today Fred Wilson makes a plea for transparent audience-measurement across Web and Mobile (however the boundary is blurred).

To be clear Fred is a sparkling, open commentator and a man of integrity (to my knowledge) - so this attack on his opinion is not ad hominem (far from it) I have engaged with him and his many other intelligent (mostly) visitors at the fantastic waterhole on the web known as avc.com.

However, there is a constant clamor from amongst the "Investor" classes ( Venture Capital and Investment banking) for more metrics and transparency. This is a mistake !

Metrics are tools to help guide a ship - even the word to "log" is derived from the count taken as a log on a piece of string floats past a sail-ship in motion as the ancient speedometer. David Skok explains brilliantly at forentrepreneurs.com how these metrics can be used - for example in the case of a SaaS business like ours.

When these metrics are made available to third-parties they make investment a "no-brainer" and some VC's go as far as to say given metrics X,Y and Z they will deliver funds.

There is an implication that I would like to present. Insofar as metrics de-skill an investment decision it is because they describe historical trends. These trends are created by the clients whether Consumer or Enterprise who collectively imply - "this concept has value" or traction as it is known. Investing on the basis of historical trend is known as technical trading, it can be fully automated where information is available (as in stock markets). The cost of so doing can be shown to be a Tragedy of the commons to quote:

"The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone's long-term interest for this to happen."
The reason that this is waste is simple - As long as investors invest on what is apparent from history, there is no Fundamental analysis and the state of human knowledge is not expanded (data is merely added and derived).

The extremely valuable role of the entrepreneur and venture capitalist is opposite to this. It is to take risk and depart from historical norms, to disrupt and thereby fundamentally enrich society, by applying imagination creativy and insights that are not obvious. Against this risk a premium can and should be paid, with the reward going to he or she who delivers most.

If we pander to the markets, scrabbling for the monies they offer, we are effectively buying back what is ours and what we as a market create. Therefore to invest in being investable, rather than to invest in enhancement, is nothing more or less than tragedy as described above.

I rather hope that Fred and his cohorts (cohort analysis is another business metric device) in the investment industry will reflect on the fact that they, in calling for investment in metrics to judge rather than to steer, are in danger of reducing the perception of value they normally offer to just another commodity.

Our bank-managers used to hold positions of discretionary authority. Those days are gone - the result is obvious to many. Don't go the same way - we as a society need your skills !